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GENERAL LAW
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On 12 May 2026, the Federal Government announced one of the most significant changes to trust taxation in a generation. From 1 July 2028, trustees of discretionary trusts will pay a minimum 30% tax on the trust’s taxable income, a fundamental departure from the long-standing flow-through treatment that has underpinned family trust planning in Australia for decades.
The announcement has triggered immediate questions from clients who hold business interests, investment portfolios, or estate planning arrangements through discretionary trusts. It also raises pointed questions for families who use testamentary trusts (trusts created inside a will that activate on death) as a core part of their succession planning.
This article sets out what the measure does, who it affects, how the numbers work in practice, and what families and business owners should be thinking about between now and 1 July 2028.
A note on status: this is an announced measure, not yet law. The Australian Taxation Office has confirmed the measure is in the announcement phase, and significant design details remain unsettled pending the release of exposure draft legislation. The commentary below is based on the Budget materials released on 12 May 2026 and is current as at the date of publication.
Under the current law, a discretionary trust is taxed as a flow-through vehicle. The trust itself generally pays no tax. Instead, income is distributed to beneficiaries who are presently entitled to it, and each beneficiary pays tax on their share at their own marginal rate. This is the mechanism that allows families to “split” income across multiple beneficiaries (typically a working spouse, a non-working spouse, and adult children) to reduce the household’s overall tax bill.
The announced measure changes this in three core ways:
The Government has indicated a three-year restructure rollover (running from 1 July 2027) to assist families and businesses in restructuring before the measure takes effect.
The measure does not apply to every trust. The carve-outs include:
Specific income categories are also carved out, including primary production income, certain income derived by vulnerable minors, and amounts already subject to non-resident withholding tax.
The testamentary trust position requires careful attention, because the announced carve-out is narrower than headline summaries suggest.
A fixed testamentary trust appears excluded on the basis of its character, fixed trusts are excluded generally. A discretionary testamentary trust appears excluded only if it was already in existence on 12 May 2026.
Several questions remain unresolved on the materials available so far:
These questions cannot be answered with confidence until exposure draft legislation is released. They are, however, the questions every family with an existing will or estate plan should be asking now.
The examples below assume Australian-resident adult beneficiaries with no other income, no franking credits, no CGT discount amounts, and no excluded income categories. Medicare levy is excluded for simplicity. The calculations use the 2024–25 resident individual tax rates as a working proxy, the rates and thresholds applicable in the 2028–29 income year are not yet known.
Component | Amount |
Trust taxable income | $100,000 |
Trustee minimum tax (30%) | $30,000 |
Beneficiary assessable income | $100,000 |
Beneficiary’s tax on $100,000 | $20,788 |
Non-refundable credit for trustee tax | $30,000 |
Top-up tax payable | nil |
Excess credit (lost) | $9,212 |
Total tax borne on the $100,000 | $30,000 |
Effective rate | 30.00% |
Under current law, the same individual would pay $20,788. The new measure adds $9,212 of tax to this arrangement, because the excess credit cannot be refunded.
Component | Per beneficiary | Total (3) |
Assessable income | $33,333 | $100,000 |
Beneficiary’s tax | $2,421 | $7,264 |
Credit (share of trustee tax) | $10,000 | $30,000 |
Top-up payable | nil | nil |
Excess credit (lost) | $7,579 | $22,736 |
Total tax borne | $30,000 | |
Effective rate | 30.00% |
Under current law, three beneficiaries each on $33,333 would pay $7,264 in total. The new measure increases the burden by $22,736, more than tripling the tax payable.
Component | Per beneficiary | Total (5) |
Assessable income | $20,000 | $100,000 |
Beneficiary’s tax | $288 | $1,440 |
Credit (share of trustee tax) | $6,000 | $30,000 |
Top-up payable | nil | nil |
Excess credit (lost) | $5,712 | $28,560 |
Total tax borne | $30,000 | |
Effective rate | 30.00% |
Under current law, five beneficiaries each on $20,000 would pay $1,440 in total. The new measure increases the burden by $28,560, a roughly twenty-fold increase. The income-splitting benefit of the discretionary trust is entirely collapsed where every beneficiary sits below the 30% marginal rate.
For comparison, an individual earning $100,000 of interest income in their own name pays:
Bracket | Amount | Rate | Tax |
$0 – $18,200 | $18,200 | 0% | $0 |
$18,201 – $45,000 | $26,800 | 16% | $4,288 |
$45,001 – $100,000 | $55,000 | 30% | $16,500 |
Total | $100,000 | $20,788 |
Effective rate: 20.79%.
Comparison
Scenario | Structure | Total tax | Effective rate |
1 | Discretionary trust, 1 beneficiary | $30,000 | 30.00% |
2 | Discretionary trust, 3 beneficiaries | $30,000 | 30.00% |
3 | Discretionary trust, 5 beneficiaries | $30,000 | 30.00% |
4 | No trust, individual earns directly | $20,788 | 20.79% |
The conclusion from these four scenarios is straightforward: under the proposed measure, holding income-producing assets through a discretionary trust produces a worse outcome than holding them personally, for any income level where the individual’s average rate sits below 30%. The number of beneficiaries does not matter. The splitting benefit is gone.
Trust taxable income of $300,000 split equally between three adult beneficiaries ($100,000 each). Beneficiary 1 has $200,000 of other salary income; Beneficiary 2 has $50,000 of other salary income; Beneficiary 3 has no other income.
Trustee minimum tax at 30%: $90,000 ($30,000 credit per beneficiary).
B1 (high earner) | B2 (mid earner) | B3 (no other income) | |
Other income | $200,000 | $50,000 | $0 |
Trust distribution | $100,000 | $100,000 | $100,000 |
Tax attributable to distribution | $42,750 | $32,550 | $20,788 |
Trustee credit | $30,000 | $30,000 | $30,000 |
Top-up payable | $12,750 | $2,550 | nil |
Excess credit (lost) | — | — | $9,212 |
Tax borne on distribution | $42,750 | $32,550 | $30,000 |
Total tax on the $300,000: $105,300. Under current flow-through law: $96,088. The extra tax under the measure is exactly the wasted credit on B3’s distribution.
The point: the measure is neutral for above-30% beneficiaries. The credit mechanism produces parity with current law for them. The entire cost of the measure is concentrated on distributions to beneficiaries below the 30% threshold.
Trust taxable income of $200,000 distributed entirely to a corporate beneficiary taxed at 25%.
Step | Amount |
Trustee minimum tax (30%) | $60,000 |
Corporate beneficiary assessable income | $200,000 |
Company tax (25%) | $50,000 |
Credit available to company | nil |
Total tax at the corporate/trust layer | $110,000 |
Effective rate before dividend to shareholders | 55.0% |
If the company then pays the after-tax balance as a dividend, further tax arises at the shareholder’s marginal rate. The trustee-level $60,000 does not generate franking credits, so only the company’s $50,000 of tax is available to frank dividends.
The point: bucket company structures become economically punitive under the announced design. Two layers of tax stack on the same income with no credit relief between them. Even before any dividend is paid, the effective rate is 55%. The legislative detail here remains the most unsettled part of the announcement, and the design will need careful review when exposure draft legislation is released.
Trust taxable income of $40,000, retained by the trustee. Under current law this attracts s 99A tax at 45% — $18,000.
The announced minimum tax sets a floor, not a ceiling. It applies “unless higher rates already apply”. Where trustee income is taxed under s 99A at 45%, that higher rate continues. The minimum tax does not reduce the trustee’s liability.
The point: the measure does not displace existing higher trustee rates. It is targeted at one specific pattern of use — income flowing out to beneficiaries on low marginal rates — not at every aspect of discretionary trust taxation. Some commentary has framed the measure as a comprehensive overhaul. It is not.
For families with discretionary trust structures, several practical conclusions follow from the announced design:
Income splitting to low-rate beneficiaries no longer works. The pre-eminent income tax advantage of the discretionary trust — the ability to direct distributions to spouses, adult children, or other family members on lower marginal rates — is removed for any beneficiary below the 30% threshold. The credit mechanism ensures that the tax payable on the distribution is always at least 30%, regardless of who receives it.
Non-tax reasons for discretionary trusts remain. Asset protection, succession flexibility, creditor insulation, and the ability to alter distributions as family circumstances change are all unaffected by the measure. The case for a discretionary trust does not disappear — it shifts. For many families, those non-tax reasons remain compelling on their own.
Bucket company structures require urgent review. The double-taxation outcome for corporate beneficiaries is severe, and the three-year rollover window (from 1 July 2027) is designed to allow restructuring before the measure takes effect. Families with bucket companies should be reviewing their structures now, not closer to 1 July 2028.
Testamentary trusts need a careful look. Trusts in existence on 12 May 2026 are grandfathered, but the position for trusts arising under wills executed before that date — but where the testator dies after — is unclear. Families with existing wills should obtain advice on whether their estate planning remains effective under the announced regime, and whether any amendments are warranted.
The 1 July 2028 commencement is closer than it looks. The intervening period is intended for legislative drafting, consultation, restructure, and transitional planning. Families who delay until the legislation is enacted will have a compressed window to act, and may miss the rollover relief.
The measure is announced, not enacted. Significant design details remain unsettled, including:
Exposure draft legislation is expected in due course, and the design may shift in material ways during consultation. The worked examples above use 2024–25 individual tax rates as a proxy; the rates and thresholds for the 2028–29 income year are not yet known. Medicare levy has been excluded from the calculations for simplicity. Real-world figures will differ.
The announced measure has potentially significant consequences for families who hold business interests, investment portfolios, or estate planning arrangements through discretionary trusts. The three-year rollover relief period offers a structured window to review existing arrangements, but the time to begin that review is now, not in 2028.
If you would like advice on how the proposed measure may affect your existing trust structures, your testamentary trust arrangements under an existing will, or your bucket company holdings (and what your options are during the transitional period) please contact our office to arrange a consultation.
Disclaimer
The contents of this article are considered accurate as at the date of publication. The information contained in this article does not constitute legal advice. Readers should seek legal advice about their specific circumstances.
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Please describe your enquiry below
Not at all. The asset protection, family law protection, and vulnerable beneficiary protections remain entirely intact regardless of the tax treatment. For many families, those benefits alone justify using a testamentary trust. The proposed changes reduce the tax advantage — they do not eliminate the other reasons these structures exist. A testamentary trust that protects a vulnerable child’s inheritance from being lost to addiction or a failed relationship does not become less valuable simply because the income tax concession shrinks.
Probably not immediately. Testamentary trusts in wills existing at 12 May 2026 appear to attract a specific exemption under the budget papers — income from those trusts is a carved-out category. However, you should confirm with your solicitor whether your existing will’s trust provisions are discretionary or fixed, and monitor developments as the legislation is finalised. Making changes before the law is settled may be premature.
Not technically. Australia abolished death duties in 1979. A death tax is a tax imposed on the transfer of assets at death. What the government is proposing is a change to how income distributed from discretionary trusts is taxed in the hands of beneficiaries after the trust is operating. The practical effect for some families may feel similar — particularly for those who established testamentary trusts specifically for the income tax concession — but legally and structurally, it is a different thing. The characterisation has stuck in the media because it resonates, not because it is legally precise.
If your existing will is current, reflects your wishes, and already includes testamentary trust provisions created before 12 May 2026, there is no urgency to sign a new will purely because of the budget announcement. For those who do not yet have a will — or whose existing will is significantly out of date — the budget announcement is a useful prompt to act, but the trust tax question should not drive the timing. The overall quality and currency of your estate plan matters more than the trust tax position, which remains subject to change.